QUESTION 1 (a) You are considering investing in a stock index and a bond index with following expected returns and standard deviations: Stock index Bond index Expected return (%) 10.5% 6.5% Standard deviation (%) 15.0% 9.0% The two indexes have a correlation of 0.40. Construct an efficient portfolio with lowest possible variance. What is the return and variance of this portfolio? If you want to reduce the risk of this portfolio, how much would you need to invest in the risk-free security offering 3% return while earning portfolio returns of 6.5%? You may use the following equation for calculating weights for the lowest variance portfolio: 0-0,0P AB o'+0-20,0BP AB (15 marks) BP A b) At the beginning of the year, you invested $4,000 in 80 shares of America Inc. At the end of the year, you sold 80 shares for $59 per share and received dividends of $5 per share. Compute the total Holding Period Yield on these shares. Calculate how much of the total return was earned due to the price change and how much due to the dividend income. (5 marks) (Total 20 Marks)